It has been over 30 years since (the early 80’s out of control inflation) mortgage rates were the highest in history at 20 plus per cent. Monetary policy at the time was to wrestle inflation by increasing interest rates. The idea was to restrict consumption with high interest and tight credit. There was no such thing as a ‘Line of Credit’ back then. Since then the floodgates (cheaper money and easy credit) were opened wide and we went from highest to lowest rates in history. It took almost 20 years for rates to return to single digits. Then the dot.com stock crash in 2000 followed by the September 11, 2001 attack on the World Trade Centre led federal governments around the globe to lower rates faster than before due to avert economic collapse. We were told to consume to help the economy, and expansion was a good thing. The prime rate which dropped to a low of 2 per cent, along with the new ‘line of credit’ product, allowed consumers to access home equity with like never before. This led us to an unprecedented spending frenzy. Lower rates fuelled the housing market to a boil. Prices doubled in less than 12 years. Everyone had equity. Today everyone has debt. The pendulum has swung hard to the other extreme. Everything has changed, with the exception of high interest rate credit cards. The federal government (who caused it all) is now telling us we have too much debt and to pay down our debt at a time when property taxes, provincial and federal income taxes topped up by a 13% HST are at all-time highs. At the same time wages, house prices and the economy flattened. Now experts say rates have been so low for so long that it is extremely difficult to wean us off ‘the cheap-money drug’ without causing an economic collapse. Most people became spending with credit, addicts and addictions are hard to break. Most people cannot save, let alone pay off high interest debt anymore because the feds eliminated the ability to refinance above 80% of value. So there is the ‘trap’. Too many people have lines of credit making interest only or minimum payments and excessive credit card debt exploded. Governments around the world are also trapped with unprecedented debt. In fact many countries are now bankrupt. The majority of us have new cars, new houses, flat screen tv’s, new appliances, fancy computers and mobile devices, and on and on, because we were effectively ‘brainwashed’ into living beyond our means. Are we better off than before? In many ways, ‘Yes’. We are better of with modern conveniences and luxuries than the rich were one hundred years ago. We have flush toilets don’t we? In the biggest way, financially speaking, the answer is an emphatic ‘No’ given the inability to pay off debt together. Way too many people are playing ‘Rob Peter to Pay Paul’. This does not bode well with the prospect of higher interest rates and even higher payments in the future. Interesting to note that the average mortgage payment today is virtually the same as it was in the high interest rate environment some 30 years ago. That’s because house prices and mortgages have almost tripled. Do your children have cell phones and computers and have manicures and pedicures? Time to cut back ya think? As for adult children moving back home? Well we will leave that one for another day. Answers are few, we can only think of two (it would appear) to pay down debt is to ‘Make More Money Honey! Mom & Dad, get part time jobs and put your teenage kids to work too! Put every loonie, quarter, dime, nickel, (forget about pennies, they don’t count any more) towards debt repayment. Secondly put together a budget and find savings to put towards debt. Better yet and since old fashion budgets rarely work, give Ron a call to consider SMART EQUITY cash flow management/debt reduction system. It’s amazing! And it will change your life!
WHY WE’RE STUCK IN A LOW INTEREST RATE ‘TRAP’
Posted by: Tracy Luciani Price